FTC cracks down on franchises

Kim Sang-jo, chairman of the Fair Trade Commission, during a press briefing on Tuesday in Sejong. [YONHAP]

Franchise headquarters may soon be required to compensate franchisees for financial losses incurred from the actions of their top brass after several high-profile scandals involving company chairmen led consumers to boycott their chains - at the cost of individual franchise owners.

The Fair Trade Commission on Tuesday proposed a set of measures to protect franchisees from mistreatment at the top. They include a requirement for franchise headquarters to have compensation plans written into their contracts and for the country’s 50 biggest franchising companies to disclose the price of all items that it requires franchisees to purchase, from food ingredients to disposable products like paper cups.

The Fair Trade Commission is working with lawmakers to pass the reforms.

“The franchise business is an important means of creating jobs,” the commission’s chairman, Kim Sang-jo, said during a press briefing Tuesday. “While [the franchise businesses] has exploded externally, internally, there are many issues that are concerning.”

Franchising companies will face harsh penalties if they take any retaliatory action against franchisees. The measures come as the owners of several chains have been at the center of bad news.

Hosigi Chicken stores suffered heavy losses last month, with some restaurants seeing their daily sales cut in half, due to a widespread boycott of the chicken chain after as its founder and owner, Choi Ho-sig, was accused of sexual harassment. A surveillance video outside a hotel in Gangnam District, southern Seoul, showed the 64-year-old trying to stop a young employee of his company from jumping into a taxi after he allegedly tried to book a room for them.

While franchisees have suffered the consequences of Choi’s actions, under the current law, there is no way for them to seek financial compensation from headquarters.

In another high-profile case, Jung Woo-hyun, owner of the Mr. Pizza franchise, was recently arrested by prosecutors after he was found to have forced franchisees to buy items at higher than the market price. The items were supplied by a company owned by his own family member.

Franchising companies have justified mandatory purchase of supplies at a higher price by arguing that every store doing business under their name has to provide the same taste and experience to consumers.

According to the Fair Trade Commission, these mandatory supplies account for 87.4 percent of all of items that franchisees purchase. The commission added that these items have been distributed with a lack of transparency. Franchisees can’t be sure if the supplier is run by relatives of the franchise owner or if franchising companies received bribes from suppliers.

Franchising companies will now have to specify the minimum and maximum ceiling on prices of mandatory supplies and the ratio of these purchases to revenue. Until now, franchisees only received lists of items they were required to buy.

The Fair Trade Commission said it will also start assessing the market’s performance, including the margins that franchising companies make from mandatory supplies. The commission will first focus on business areas that are popular, including chicken restaurants, pizzerias and bakeries.

Franchising companies found to have falsified information on the prices of items that franchisees bought will have their license revoked.

“In the case of advanced economies [the franchising company and franchisees] share profits by basing their brand loyalty payment on the revenue and profits,” Kim said. “But in the case of Korea, the headquarters make profits by other means such as forcing the purchasing of mandatory items and promotional events.”

According to the Fair Trade Commission, the local franchise market has been expanding at a rapid pace. As of last year, there were over 4,200 franchising companies with 219,000 stores in the country. That’s a significant increase from 1,009 companies and 107,000 stores in 2008.

At the same time, the number of violations reported have doubled from 247 cases in 2008 to 511 last year.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]